Absolute versus relative wealth in a capitalist society

I’ve been debating and discussing inequality with an economist friend over the past few months. We’ve covered a lot of ground in our discussions, including national versus global inequality, absolute purchasing power, and the need for incentives to innovate. This morning, I read the following Q&A in my Quora feed, and I thought it was a good topic for a blog post:

A thought experiment. Imagine taking a person from 1800, say at the 99th percentile of wealthy then, with their material conditions: no indoor plumbing, short life expectancy, primitive medical care, likely infested with parasites that today would be unacceptable for a house pet, etc. Now imagine exposing them to the accommodations of someone in 2015 America in welfare: color television, air conditioning, fresh vegetables in winter, cell phones, paved roads, etc. The 1%-er from 1800 would consider them wealthy beyond their wildest imaginations to be “poor” in 2015. It is in that sense that everyone can be wealthy under capitalism.

Now, of course, if you define wealth in a relative sense, then no, not everyone can be wealthy for the same reason that not everyone can be above average in something. This is not economics, but math.

I thought this was a great way of summing up modern US society. To be clear, I have a serious problem with the use of these concepts by the right wing to attack public assistance beneficiaries, and I think automation and machine learning technology is leading us to an economy where we will need more of a guaranteed income – and less of a cultural focus on paid labor in our society. However, this quote illustrates the true absolute well being of the typical American household in the early 21st century. By now, most of my close friends are probably sick of me exclaiming my awe and amazement at the advancement of our society – clean water, universal primary and secondary education, ubiquitous air conditioning and heating, car transportation, affordable air transport, micro computers (smart phones) in our pockets that can communicate (even video chat) with almost anyone in the world, advanced medicine, abundant/varied diets, etc. We live in a remarkable world.

In my discussions with my friend on income inequality, I now have a favorite graph that describes the past 20 years in income inequality:

This chart is from a WorldBank Paper available here – and it’s a great read.

The graph shows the increase or decrease in income over the past 20 years by percentile, and shows that while the poorest in the world (generally sub-Saharahan Africa) have experienced no increases in income in the past 20 years, the global poor (China, India, Southeast Asia) have experienced massive gains in income – lifting billions out of poverty. This trend declines around the global 75th percentile of income earnings – and those at the 75th percentile to the 85th percentile of global income experienced moderate declines or stagnation in income in the past twenty years. These, generally speaking, are the developed world working class – and this is the cost of the massive gains in income across most of the world. Moving further up the curve, we see that the global 1% have experienced income gains approximating 60%. The paper describes the global 1% as including the US 12%:

Who are the people in the global top 1%? Despite its name, it is a less “exclusive” club than the US top 1 percent: the global top 1% consists of more than 60 million people, the US top 1% of only 3 million. Thus, among the global top percent, we find the richest 12 percent of Americans (more than 30 million people) and between 3 and 6 percent of the richest Britons, Japanese, Germans, and French.

In the US, the top 12% of households probably earn about $120,000, judging from the data here. This is basically consistent with the American and Western European upper middle class.

To cast my own story about this chart, I believe the developed world upper middle class (software developers, corporate middle managers, sales people, etc.) and the upper class in developing countries presided over the outsourcing of US manufacturing jobs to lower labor cost countries; they were well paid for this transition. The costs to the working class in the US are apparent, but the gains for most of the global middle class are also apparent. The chart, and this post, do not address the implications of increased wealth concentration at the .1% level in the US, but I think it is important to take a global perspective on the income inequality discussion, and also to consider the absolute income/living standard implications of this data.

On an absolute basis, the Quora answer is right about most people in the US – even beneficiaries of public assistance in the US live at a level of material comfort that is better than the level that most humans have enjoyed throughout the 200,000 years that modern humans have existed. I think this realization can inform much of the discussion of income inequality too. Specifically, I wonder if we’re too focused on the top of the income inequality debate. From an ethical perspective, should we focus on how to lift as many people in the world as possible out of poverty? So much of the public discourse and political discussion focuses on the easy target- criticizing the wealthy, when the more important focus is on the bottom of the income distribution.

How do we raise the whole of the world (including those in the US) out of poverty to a standard of living where they can live in safe, clean, dry, warm/cool homes; with adequate access to healthcare, clean water, healthy food, freedom from war, and access to basic education? The data in my favorite chart suggest that we’re further along in these regards than we were in 1988. These findings shake some of my own long-held ideologies about global capitalism. The findings also raise questions about our ability to continue to raise global living standards while mitigating environmental/climate impact.

If nothing else, this data can inform how the middle and upper middle class in the US view our lot in the world. As I’ve addressed in this blog post, we are essentially affluent carbon emitters, and we live at a level of historically unprecedented material comfort. With this in mind, perhaps it is time for us to shift our collective focus from aspirations of greater levels of material affluence towards greater focus on frugality, sustainability, and efficiency in all aspects of our life. Perhaps it is time to down-shift and focus on quality of life/leisure over acquisitiveness.

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